Sari Wahyuni

Sari Wahyuni

Associate Professor

Faculty of Economics

University of Indonesia

Jakarta , Indonesia

Lili Sudhartio

Managing Partner

MD Consult Indonesia

Bogor , Indonesia

Key word: International joint venture (IJV), absorptive capacity, bargaining power, value appropriation, appropriated international rent, inbound spillover rent, automobile industry, Indonesia, Japan


This research examined the influence of bargaining power and absorptive capacity on value appropriation, both appropriated relational rent and inbound spillover rent in International Joint Venture (IJV). From 112 top management IJV Indonesia-Japan in automotive industry, it is found that value appropriation both appropriated relational rent and inbound spillover rent could only be achieved by local partners through absorptive capacity improvement. Meanwhile bargaining power held via control has no significant relation to appropriate performance. Significant implications are that resources with no appropriate ability, dominant design paradigm and not complementary asset of other partners, will become less useful resources in improving bargaining power. Managerial implication of this research shows that local partners have to improve their absorptive capacity in order to be able to appropriate their performance. Policy implications is that government is expected to be more concerned on developing infrastructures, providing better education structure and investment climates.

Keywords: joint venture, absorptive capacity, bargaining power, value appropriation, appropriated relational rent, inbound spillover rent, automobile industry, Indonesia, Japan.

Foreign investment in the world economy has decreased significantly since 2000, from its value US$ 1,396 billion in 2000 to US$ 648 billion in 2004. On the contrary, foreign investment in Asia slightly increased from US$ 146 billion in 2000 to US$ 148 billion in 2004. Most investment went to China (US$ 95 billion) and Southeast Asia (US$ 26 billion), while total foreign investment to Indonesia is only US$1 billion (UNCTAC, 2005).
Small investment stream in Indonesia reflected their low competitive advantages. It was getting worse when Japanese and Koreans corporations relocated their investments from Indonesia to other countries in 2002 (Thee, 2006). They definitely relocated to other countries where business climate are more conducive for investment such as cheaper available workforces and clarity of law enforcement (Kinoshita, 2005). Although it’s appear that there is downsizing investment climate in Indonesia, Japanese recorded as the biggest investor since 1967 until 2004, with total accumulation 19.47% of foreign investment in Indonesia (Thee, 2006). There are 875 Japanese companies operated in Indonesia and 549 (63%) are Indonesian  – Japannesse International Joint Venture (IJV) (Jetro, 2006).
IJV is business organization with its own legal status; consist of consolidated capital among partners (Gulati, 1998). IJV not only highlighted business activity aspects to develop competitive companies, but also concerned on exchange aspects of various knowledge and developing good cooperation in products, technologies and services development (Gulati, 1998). Other benefits of IJV are providing access to asset or complementary capabilities, learning opportunities from partners, reducing risks or costs compared to running their own businesses (Ireland, Hitt & Vaidyanath, 2002; Boateng & Glaister, 2003). However, IJV has many risks such as negotiation and coordination costs; probability of opportunism from one party’s interest, and the scary one is leaks of specific knowledge and skills to competitors (Suend , 2001; Kemp, 1999).
In managing IJV which might be colored with opportunistic behavior, we need to have confidence to our partner and maintain our bargaining power position. By having bargaining power, partners could control their strategic, structural areas and daily operational decisions in order to appropriate benefits of their cooperation (Coff, 1999). In the management field, this is known as relational rent (Dyer & Singh, 1998). Relational rent is benefit drawn from a relation or connection (Dyer & Singh, 1998); or benefits earned because of combination, exchange and development of idiosyncratic resources in alliances (Lavie, 2006). Whereas Inbound Spillover Rent is benefit which intentionally or unintentionally received by partners throughout their cooperation (Lavie, 2006). For example, the partnership between Astra and Toyota bring positive image for Astra which eventually made them easier in getting soft loan from the bank.
Dyer & Singh’s (1998) research on automotive industry found that brand holders could appropriate rent better than their suppliers. It means that relational rent in automotive industry is not distributed very well. On the other hand, Coff (1999) highlighted the fact that many stakeholders who have bigger bargaining power could appropriate rent better than stakeholders who have less bargaining power.
The aim of this research is trying to scrutinize the important factors that can be used by local partners to appropriate their performance, for example by improving bargaining power, taking control, and increasing absorptive capacity. Instead of analyzing appropriated relational rent and components of inbound spillover rent that could be appropriated by local partners, this study also focused on each component of bargaining power, control and absorptive capacity.

As explained earlier, this research strives to find the important factors that can be used by local partners to appropriate their performance. Our research literature shows that partner appropriated performance is influenced by bargaining power position, absorptive capacity and control. Bargaining power can be defined as bargainers’ ability to change subjects to a more profitable direction (Lax & Sebenius, 1986), win over the discussions (Dwyer & Walker, 1981; Tung, 1988), and influence the results (Schelling, 1956). In relation to IJV, bargaining power can be interpreted as the ability to control and manage IJV (Yan & Gray, 2001).
Partners who have greater bargaining power normally have more control in IJV.  Partners’ control could be structural control, operational control or strategic control (Zhang & Li, 2001; Geringer & Hebert, 1989, Wahyuni et al. 2007). Structural control is control related to IJV organizational structure development, decisions on human resource policies, IJV system and Standard Operating Procedure (SOP), and formulation of IJV contract.
Another control is operational control, in which partners participate in decision making of planning and budgeting, and daily operational policies.  Participating in daily activities could be in production, advertising, selection and dismissing employees, and even in strategic planning routines (Douma & Schreuder, 2002). A third type of control is Strategic Control which is related with strategic decision making policies (Yan & Gray, 1994). By having Strategic Control, partners could influence the strategic decisions process, marketing policies, investments, and  distribution of profit/dividend  .
The successful of partnership can be seen from partner’s satisfaction on IJV performance and partner’s ability to appropriate their performance (Coff, 1999; Lavie, 2006). This is how local partners could appropriate their relational rent, namely Appropriated Relational Rent and Inbound Spillover Rent (Lavie, 2006). This partner appropiate performance is highly influenced by exploratory, transformative and exploitative learning. Figure 1  shows the theoretical model of this study.

Figure 1.  Theoritical Model

Figure avaliable in printed version

We use two types of methodology of this research: (1) Qualitative research and (2) Quantitative research. Our unit analyzes are top executives of IJV between Indonesia-Japan in the Indonesian automotive industry.
1.    Qualitative research
At the beginning of this study, we conduct explorative research by using in-depth interviews. The aim of these interviews are to find information whether our local partner have been able to appropriate their performance or not. If yes, how they got it? What are the important variables that can influence the above process?
We interviewed 22 executives and experts in automotive industry. They posit as Board of Director or General Manager of local partner. Besides that we also interviewed 10 former executives in automotive industry of Indonesian – Japan joint venture, Chairman of Indonesia Vehicle Industry Association (Gaikindo) and Chairman of GIAMM (Motorcycle and Car Parts Industry Association – Gabungan Industri Alat Mobil dan Motor).  All interviews are tape recorded. Most of the interviews took more than one hour and many of them lasted more than two and a half hour.
Steps taken in analyzing interview results are: (1) preparing transcript of interview; (2) grouping interview results; and (3) analyzing those various significant opinions. To ensure internal validity of this study, we conducted triangulation between experts. We seek whether there is a pattern matching or similar meaning of quote that is reconfirm to each other which eventually increase the reliability of the data.
The result of our explorative study shows the importance of local partner reputation, superiority of local partners to foreign/ Japanese partners, the importance of IJV agreement, IJV benefits to local partners and Japanese partners, and the eminent role of government.  Those variables will influence each other. For example, partners whom perceived IJV as an important part of their business normally would like to execute more control in their cooperation. Nevertheless, most of our informants also stated that local partner normally have a relatively less bargaining power compare to Japanese partners. Knowledge of local market which normally become the key bargaining position of Indonesian partner is no longer become a crucial point because throughout the time the Japanese can learn the recipe of the market. During the last ten years, they even acquired many key distribution channels which eventually decrease the interdependency of International partner toward local partner. This low bargaining power eventually results in low power of control as well.    The result of the interviews will be incorporated in the analysis of this study.

2.    Quantitative Research
We distributed 400 questioners to IJV corporate executives who are in the position as CEO (Chief Executive Officer) or at least as General Manager of IJV between Indonesia-Japan. Although there were 235 questioners returned, there were 84 invalid questioners due to incomplete answers, fulfilled by retired CEO, or the status of their company is no longer joint venture anymore. Finally, we precede 131 questioners.  The demography of our respondent can be explained as beneath:
1.    IJV corporations having age between 10-15 years old is the highest profiles (23.81%), next is corporations with age more than 30 years old (20.63%), and the least is corporation between 1 – 5 year old (3.17 %).
2.    Based on share holding composition, local partners have less than 50% share holding i.e. Japanese partners’ share holding in IJV is bigger than local partners.

Pre-test is performed before we distributed questionnaire to respondents. The aim of this pre-test is to ensure that the questionnaire is understandable by respondent. Hence, selected respondents for pre test are experts who have considerable experiences in IJV automotive industry.
Responds are grouped by using Likert scale 1-6. For the data analyzes, we use SPSS 11.5 software which is able to show required spread pictures and other related information.

Structural Equation Model (SEM) Analysis
We employ SEM (Structural Equation Model) analysis to measure latent variables by using multivariate (more than one variable). To analyze the research model, we used two-steps approach (Anderson & Gerbing, 1988; Wijanto, 2007): Measurement Model and Structural Model analysis.
Step 1. Measurement Model Analysis
This analysis is used to measure the fit of the model, validity and reliability of the research and developing interacted latent variable.
Step 2.  Structural Model Analysis
This analysis is applied to test the relationship among latent variables   in   the   model. Data processing is performed using Lisrel 8.72 and SPSS 11.5.

From structural model goodness of fit results, we conclude that model goodness of fit level is good, only three measurers showed close fit, namely GFI, AGFI and RMR (see Table 1).  Our analysis for each hypothesis can be explained as below:
Table 1. Structural Model Goodness of Fit Test

No.    Good of Fitness (GOF)    Results    Explanations
1.    Root Mean Square of Approximation (RMSEA)    0,068    Good Fit (≤ 0,08)
2.    Normed Fit Index (NFI)    0.94    Good Fit (≥ 0,90)
3.    Non-Normed Fit Index (NNFI)    0,97    Good Fit (≥ 0,90)
4.    Comparatif Fit Index (CFI)    0,98    Good Fit (≥ 0,90)
5.    Incremental Fit Index (IFI)    0,98    Good Fit (≥ 0,90)
6.    Relative Fit Index (RFI)    0,92    Good Fit (≥ 0,90)
7.    Goodness of Fit Index (GFI)    0,89    Close Fit (≥ 0,90)
8.    Adjusted Goodness of Fitness (AGFI)    0,82    Close Fit (≥ 0,90)
9.    Root Mean Square Residual (RMR)    0,082    Close Fit (≤ 0,05)

Among five hypothesis, there are 2 hypothesis have been rejected. Explanation of each hypothesis can be explained as below.

•    Hypotheses 1 (H1) : Bargaining Power is positively influence Control (Accepted Hypotheses)

H1 posited that Bargaining Power positively influence Control. In this research, it is proved that Bargaining Power (BP) has a positive and significant impact on Control (C) with t-values 9.73 and SLF = 0.85. Results indicated that the higher bargaining power of local partners, the more positive influences on control held by local partners in operating IJV. Bargaining Power in this research is measured by 3 variables namely Resources based, Strategic importance and Available Alternative. It is obvious that the higher Resources based and Available Alternatives, the higher Bargaining Power of local partners. Blodgett (1992) identified resources as access to knowledge, market, and technology, access to capital market, access to distribution channels, raw material, access to human resources, access to government and management capability.
Another measurement of Bargaining Power is Strategic Importance. Strategic Importance of IJV to local partners is very high, reflected in positive synergy between IJV business and local partners’ other businesses.  For local partners, IJV is one of their important chains in vertical / horizontal integration or diversification. On the top of that IJV’s revenue and profit provide a significant contribution for local partners. Strategic importance has negative impact to Bargaining Power (Bacharach & Lawler, 1984 and Pfeffer & Salancik, 1978). It means that the higher IJV’s Strategic Importance in the eye of local partners, the lower local partners’ Bargaining Power is.
It is also expected that the more available alternatives local partners have, the higher their Bargaining Power is. The results show that local partner’s Available Alternative in automotive industry is very low. This is reflected by difficulty of local partners in finding their current Japanese partners.
•    Hypotheses 2 (H2) : Control is Positively Influence Appropriated Relational Rent (Rejected Hypotheses)

One of the critical aspects of IJV management is how to gain and maintain control, so that we could realize our expected outcome (Yan & Gray, 2001).  However, some former studies also show that control not always has direct relation with performance (Zhang & Li, 2001; Killing, 1983). Mjoen and Tallman (1997) argued that strategic control is likely to play a significant role in granting resources contributed by partners.
The results of this study indicate that structural control in human resource management policy is mostly dominated by local partners. This is reconfirms local partners’ ability in handling human resource problem, corporate and government regulation related to human resources. However, decision making control in organizational structure is more likely the result of negotiation during the formation of IJV.
In the operational control, the role of local partners and Japanese partners are imbalance. Even in Retail Sales Stock Supply Plan (RSSP) preparation, local partners hold more control because they have more information than Japanese partners. The fact that they interact directly with customers, made them able to identify customer needs early and accurately.
Local partners have fewer roles in strategic control, especially in deciding on how much and when they can invest. This decision is closely related with changing of designs and variations of new vehicles in which local partners almost do not have any role. Therefore it is not surprisingly that until now Indonesia never able to produce their own car/motorcycle because the new design and technology are highly control by Japanese partner. This situation is even worse due to the unclarity of government policy toward automobile industry in Indonesia. In this case, government should develop a strategic positioning  on how and where are we going to bring this industry, how knowledge transfer should be developed, and how to develop integrated value chain that can support the industry.
Although initiatives usually come from local partners, this study showed that local partners also have fewer roles in deciding when and how much dividend will be shared. Japanese partners who bring technology also have appropriated their shares by receiving fee of their patent technology.

•    Hypotheses 3 (H3) : Control is Positively Influence Inbound Spillover Rent (Rejected Hypotheses)

Instead of not influencing Appropriated Relational Rent, in fact, Control also has no impacts on Inbound Spillover Rent.  Inbound Spillover Rent, which could be used by local partners are technology, capability/skills and networking. Lavie (2006) firmly argued that Inbound Spillover Rent could be materialized if there is a good relationship and both partners enjoy their partnership.
By having structural, operational and strategic control, it does not necessary meant that local partners could automatically absorb the technology brought by Japanese partners. Although technology is intangible resource and one of the important aspect of intellectual capital (Teece, 1986), the transfer of knowledge and technology development has less attention in Indonesia (Sampurno, 2006). Therefore, it is not surprisingly if local partners do not feel that they posses or have accommodated tacit knowledge after years plunging into automobile industry.
•    Hypotheses 4 (H4) : Absorptive Capacity Positively Influence Appropriated  Relational Rent (Accepted Hypotheses)

Since IJV with Japan have been established for quite sometimes and partners are well acquainted to each other, local partners feel that they can maximize their Exploratory Learning. They also do not feel any significant clash of culture during their partnership. Indonesian manager admit that they learned a lot from their Japanese partners both on production technology and management system. Not surprisingly, there are many Japanese system managements have been well implemented in IJV corporations or in other local partners’ firms.
In this exploratory learning, local partners learn to understand and absorb the given knowledge.  While in transformative learning, local partners learn how to transform its knowledge and skill and attempt to adjust them with local partners’ culture and capability level.  Local partner ability to transfer their knowledge and skill is highly depending on their shared vision and mission agreed by both partners.  It is also important for local partners to learn specific skills and knowledge not only at operational level but also at managerial level. Interestingly, Japanese partners are willing to share knowledge and educate local partners as long as it is not about product design.
The third learning level is exploitative learning in which knowledge and skill has been adopted and adjusted with local partner’s culture and capability.  Local partners acknowledged that their exploitative learning is not optimal. This is reflected from their hesitance to develop their own brands and products.
Indonesian partners also recognized that through joint venture they could gain appropriated relational rent, such as economies of scale, access to new or international markets and capability improvement. So far, they were able to do exploratory, transformative and exploitative learning although it is only limited in the field of technology production.
•    Hypotheses (H5) : Absorptive Capacity Positively Influence Inbound Spillover Rent (Accepted Hypotheses)

Our theoretical analysis showed that local partners’ Bargaining Power slightly low because the existence of IJV is very important for them. Most of the time, IJV is one of local partners’ business chains that may range from component suppliers, vehicle producer, distributors in other supported services. Local partner acknowledged that JV enables them to benchmark any kind of technology and managerial skills which eventually improve local partners’ capabilities.

This study shows that Bargaining Power can be measured through detained resources, available alternatives and the JV strategic importance level. Our qualitative and quantitative studies clearly indicate that the bargaining power of local partners is low, while variability of controls is determined by local partner’s structural, operational and strategic controls. Local partners’ Bargaining Power is low because their contributed resources are not significant for IJV.  It is stated that local partners’ have important contribution on system management, access to local market, access to local labor forces and government. Nevertheless, only system management is considered by Japanese partners as a valuable resource.  Access to local labor forces and government are not considered as determining resources.
It is apparent that Indonesian partners only play a significant role in structural control. It means that they only contribute in preparing organizational structure, human resource management, and in maintaining Standard Operating Procedure. Our hypothesis shows that bargaining power will have a significant influence toward control.  In this case, low bargaining power brings low control of the Indonesian partners.
IJV success in achieving economies of scale, entering international market, developing technology, improving capacity and financial profit, and having products with their own brands are the key measurement of appropriated relational rent. Of those six measurements, local partners have achieved four of those variables. Whereas Inbound Spillover Rent is determined by degree of technology, capability and networking.
Since there is only a few business players and brand holders in the automotive industry, local partners’ alternatives for foreign partners are limited.  This situation makes local partners’ bargaining powers even weaker.  Having weak Bargaining Power, local partners could not hold controls, especially in strategic control.
However, as fourth and fifth hypotheses stated, appropriation could be performed when local partners increase their learning capacity. There are several senses of capability related to technology, namely production capability, investment capability and innovation capability (Teece et al, 1997).Absorptive Capacity improved properly when exploratory, transformative and exploitative learning are well performed continuously and  consistently (Lane, Salt, Lyles, 2001).  Having run their business for almost 30 years, local partners have learned a lot about many aspect of automotive industry.  In sum, local partners have completed Exploratory Learning. Local partners also experienced transformative learning by transforming and adjusting received knowledge and skill with local partners’ culture and capability level.  They have not successfully passed Exploitative Learning due to many restricted fields of Japanese partners.
We have to be aware that bargaining power through control has no significant relation with appropriated relational rent or inbound spillover rent. Therefore, absorptive Capacity improvement in fact is one of the effective ways for local partners to appropriate their performance. Nevertheless, we have to admit that so far there is no single national automotive brand has been developed in Indonesia.
This study bring a clear message that absorptive capacity improvement is an effective way for local partners in appropriating both appropriated relational rent and inbound spillover rent. So, what is the implication of this research to industry policies? To improve the automobile situation in Indonesia, government should have a straight position in choosing the direction of automotive industry. Government has to decide benchmarks of successfulness automotive industry and communicate it with industry players; hence they could together determine actions to develop this industry. If government wants to open job vacancies that are large enough for Indonesian population and to reduce unemployment level, they should drive local partners to reach economies of scale and to become one of Japanese partners’ production bases.
Alternative choice to become Japanese partner’s production-base, especially in assembly line, will help private sectors to focus their business. For example, private sector can forget their dream to build national cars and more concern on establishing assembly products line sold in global market. Government is expected to be more concern on the effort of establishing Indonesia as a global spare part producer by developing a good coordination among related departments, such as Industrial, Commerce, Workforce, UMKM (SME), and Financial Departments.

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